For members


Will Germany reduce VAT to ease the cost of living crisis?

With inflation reaching its highest level since 1981, German politicians are considering other measures for easing the financial strain on consumers. Could a reduction in VAT be on the horizon?

Will Germany reduce VAT to ease the cost of living crisis?
"Tax cut on everything" is written on a receipt in a Penny store from 2020. Photo: picture alliance/dpa | Rolf Vennenbernd

What’s the background?

Increasing energy prices have been driving up the cost of living in Germany for months, and the Ukraine war has exacerbated the situation.

Massively rising energy costs are not only hitting consumers hard at the petrol pumps, but also in the supermarkets.

Over the last few weeks, a number of Germany’s biggest supermarket chains, including Aldi, Edeka and Rewe, have increased the prices of hundreds of products. 

According to Focus Online, prices for butter, coffee, and meat have risen sharply in the last few days, with the lowest price for 250 grams of “German-brand butter” now €2.09.

A breakfast of coffee with bread, butter and marmalade. Photo: picture alliance / dpa-tmn | ASA Selection

According to a recent YouGov survey commissioned by Postbank, around one in seven adults in Germany (15.2 percent) say they can now barely meet their living costs. 

What is the outlook?

At the end of March, the Federal Statistical Office (Destatis) announced an inflation rate of 7.3 percent – the highest since 1981 and a jump of 2.5 percent from February.

READ ALSO: German inflation hits post-reunification high at 7.3 percent

According to Deloitte’s chief economist, Alexander Börsch, who recently spoke to Focus Online, whether inflation remains as high as it is or even heats up further will largely depend on how the Ukraine war develops.

“If these energy supplies break off, whether due to a halt by Russia or an embargo by Europe, there is a threat of a supply shock”, he said.

This means that if there is limited energy supply, the direct or indirect effect will be rising prices and, in the worst case, there is a threat of more inflation increases.

What countermeasures are being proposed?

At the end of March, the coalition government announced a relief package amounting to several billion euros to alleviate some of the financial pressure on consumers.

The measures included a €300 lump sum for income taxpayers and €200 for benefits recipients to support them with their energy bills, €9 monthly travel tickets and tax reductions on petrol and diesel.

READ ALSO: Cheap transport and tax cuts: What Germany’s energy relief package means for you

One proposal – which the AfD has put forward – is to suspend value-added tax (VAT) on food and fuel. Parliamentarian René Springer told DPA: “We now need significant tax cuts on food and fuel to avert existential hardship for millions of citizens.”

How likely is it that VAT could be reduced?

According to experts from the Bundestag’s Research Office, a short-term suspension of the value-added tax on gasoline, diesel, heating oil, gas, electricity, or basic foodstuffs in order to cushion the extreme price increases would not be possible under European law.

In an analysis of the legal situation, the experts refer to the so-called EU VAT Directive in which the member states set common guidelines for value-added tax to ensure uniform conditions of competition.

The inscription “for you 16%” as well as the crossed-out inscription “19%” indicate the reduced VAT rate of 16 percent on a shop window in November 2020. Photo: picture alliance/dpa | Hauke-Christian Dittrich

According to the directive, the regular tax rate must be at least 15 percent, and the reduced rate must be at least 5 percent. Accordingly, total tax exemptions are only possible in certain areas that serve the common good, such as hospital and medical treatment or education. Food, fuel, and heating are not included in this category.

READ ALSO: German consumers to be hit by further price hikes in supermarkets

“This rules out a full VAT exemption for these services,” says the expert report, which was requested by AfD member of parliament René Springer. The national legislator is bound to the EU requirements due of the fact that VAT is harmonised and member states cannot create their own exemptions. The experts also see no “basis in EU law” for introducing a reduced tax rate for fuel and heating costs.

Although it seems that a complete halt of VAT is very unlikely, it could be that the VAT level is dropped to the European minimum. 

In 2020, the German government reduced the regular tax rate of VAT from 19 percent to 16 percent and the reduced tax rate from seven to five percent to alleviate financial pressure caused by the Covid pandemic.

Did you know?

When calculating the consumer price index or the inflation rate, the Federal Statistical Office (Destatis) uses an imaginary shopping basket of 650 goods and services purchased by private households in Germany.     

This basket of goods is constantly updated and adjusted to demand, and the reporting of price increases or decreases depends on how the prices for these goods change from month to month.

Every month, the Federal Statistical Office publishes detailed figures on the price development of certain goods, resulting in the so-called consumer price index. The change in the consumer price index compared with the same month of the previous year or the previous year is known as the inflation rate.

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For members


Why German bank customers could soon pay less for their account

A major German bank is set to scrap fees on large balances - and a number of others look set to follow. Here's why people in Germany may be paying less for their savings or current account in the near future.

Why German bank customers could soon pay less for their account

What’s going on? 

Interest rates have been at rock-bottom levels for years, making it much harder for people to get returns on their savings.

In recent years, many banks have even been levying what’s known as negative interest rates on customers. If interest normally incentivises people to save by helping them to grow their money, negative interest basically does the opposite.

If you have a certain amount of money in the bank, your bank will charge you negative interest via a deposit holding fee, which will usually be a certain percentage of your balance.

With N26, for example, balances of over €50,000 are subject to a 0.5 percent fee each year. For a balance of exactly €50,000, that equates to €250 in bank charges just for keeping your money there. 

Some banks even charge a deposit holding fee for balances as low as €5,000 or €10,000 in a current account. 

On Tuesday, ING Deutschland became the first bank to announce that it would be scrapping negative interest rates for the vast majority of its customers.

From July 1st, new customers of ING will be able to deposit up to €500,000 in their account without being charged for it, while existing customers will automatically have the fee-free amount raised to €500,000 from the current €50,000. 

Now, it seems a number of other German banks are planning similar moves. 

Why is ING Deutschland ending the holding fee?

Not entirely out of the goodness of its own heart – though that doesn’t stop it being good news for customers.

The European Central Bank (ECB) is set to make a decision on interest rates in the bloc this July, and most people expect that the bank is poised to increase interest rates from minus 0.5 percent to zero. 

Since banks have basically been passing on the ECB’s fees to their own customers, a hike in the ECB’s interest rate would spell the end of most negative interest-rate accounts in any case. But ING Deutschland said it wanted to pass on the positive interest rate trend to its customers even earlier.

READ ALSO: EXPLAINED: How to save money on your taxes in Germany

“With the increase in the fee-free allowance for credit balances on the current and extra accounts, the deposit fee is no longer applicable for 99.9 percent of our customers,” said Nick Jue, chief executive officer of ING in Germany. “We were one of the last banks to introduce a deposit holding fee and one of the first to virtually abolish it.”

He added that the bank had already kept its promise to abolish the holding fee for almost all customers before the European Central Bank made its decision.

Does this have anything to do with that court decision on bank charges?

That’s definitely a factor. According to a decision in Germany’s Federal Supreme Court last year, credit institutions have to obtain the consent of their customers when making changes to their fees and conditions.

That means that financial institutions have to ask for consent to current fees retrospectively if they don’t want hoards of people trying to claim their money back.

If a customer doesn’t consent to the fees, the bank will usually close that customer’s account.

Man signs a contract

A man in a suit fills in an official form. Photo: picture alliance/dpa/Pixabay | hnw-Gruppe

According to ING Deutschland, the scrapping of negative interest rates on balances up to €500,000 may help to sway those customers who have not yet agreed to the latest terms and conditions – including the deposit holding fee.

Anyone who agrees to the Ts&Cs will automatically be given the higher allowance as of July 1st.

“ING Deutschland expects that the increase in the allowances will convince in particular those customers who have not yet agreed to the General Terms and Conditions including the holding fee, and that the bank will thus terminate fewer customers than last planned,” ING said in a press release. 


What other banks are planning to do this?

According to reports in Bild and Bialo, the other banks planning on ending negative interest rates (or raising the threshold for fee-free balances like ING Deutschland has done) include:

  • Deutsche Bank
  • Commerzbank
  • Deutsche Apotheker- und Ärztebank (Apobank)
  • Dortmunder Volksbank
  • Hamburger Sparkasse (Haspa
  • Frankfurter Sparkasse
  • Frankfurter Volksbank
  • Mittelbrandenburgische Sparkasse
  • Nassauische Sparkasse (Naspa)
  • Ostsächsische Sparkasse Dresden
  • Sparda-Bank München
  • Sparda-Bank Südwest
  • Sparda-Bank West
  • Sparkasse Hannover
  • Sparkasse Pforzheim Calw
  • Volksbank Stuttgart

What does this mean for my savings?

There’s good news and bad news.

The good news is that, from July, you’ll no longer have to pay exorbitant charges just to store your money in a safe place – and you won’t be penalised for saving more. The bad news, on the other hand, is that low interest rates aren’t going away anytime soon.

So while you won’t be losing money hand over fist, you won’t be earning much of a return on your savings either.

Banks in Frankfurt

Skyscrapers in the financial district of Frankfurt am Main. Photo: picture alliance/dpa/dpa-Zentralbild | Fernando Gutierrez-Juarez

“If the interest rate environment continues to develop positively, we will also let our customers participate in this development,” said ING Deutschland’s Nick Jue. “However, the low-interest phase will continue for the time being and broadly diversified investments will remain important.”

Getting a securities account where your money is invested is one way to try and grow your savings, as is investing in property.

Of course, people with mortgages and other loans benefit from the low interest rates – which could be why the German property market is currently booming. 

READ ALSO: Five ways Germany’s soaring inflation could affect your life